Week Ahead | Oceania Healthcare – Initiation of Coverage

31 May 2021

Global equity markets were mostly flat or up on Friday (S&P 500 index +0.01%) as bond and equity markets interpreted elevated US inflation as transitory.

US President Joe Biden issued his first full budget proposal, detailing his ambitions to expand the size and scope of the federal government with more than $6 trillion in spending over the coming fiscal year.

Investors brushed off a stronger than expected inflation reading, as the Federal Reserve's preferred consumer inflation measure, the core personal consumption expenditures (PCE) index, accelerated to +0.7% month on month and +3.1% year on year in April, topping analyst expectations. Inflation concerns were also apparent as Costco fell -2.4% despite the retailer's earnings beating expectations, after its CFO said there are “inflationary factors abound”.

Interestingly, while the ASX hit an all-time high on Friday, the NZX finished the week down and is now down -8% year-to-date as bond yields creep higher and investors sell down stocks that collected outsized gains in 2020.

Friday’s employment data (nonfarm payrolls report) is shaping up as a pivotal data release for the Federal Reserve. The May report will help central bankers understand how quickly the labour market is recovering jobs shed during the Covid-19 pandemic.

Oceania Healthcare (OCA:NZ)

OCA is a New Zealand based retirement village operator. While much smaller than the likes of Summerset and Ryman, it still has 44 villages spread across New Zealand. Oceania is focussed on premium care which is helping it deliver more recurring revenue and the benefits associated with generating higher earnings per bed. Oceania shares have pulled back from a strong rebound since covid-19, but has provided meaningful upside for investors since its IPO in 2017. We maintain a positive view on the retirement village sector with the market paying a premium given strong fundamentals and growth prospects.

We initiate coverage on Oceania with a BUY rating as it provides attractive value within the highly valued retirement village sector, with a decade-long growth tailwind in demand as the population aged above 80+ is set to grow. Valuation metrics look favourable, paying a higher dividend and priced at a lower multiple to peers, with a premium to its asset valuation only 1.13x net tangible asset (NTA) per share (the book valuation of its property). This can be contrasted to major peers Summerset and Ryman trading on 2-2.5x NTA, due to their longer track record, larger size, and better-quality perception. Over time, we think OCA can trade at higher valuations if management can prove themselves to investors and execute on growth plans.

Looking ahead, OCA’s smaller scale and lower debt levels means it has funding capacity to ramp up development activity as needed, or to make more acquisitions. At the same  time, Oceania’s strategy to focus on premium care will help deliver a higher level of recurring revenue which implies earnings will be less reliant on expanding development activity.

We are Adding OCA to our NZ Model Portfolio at a 6% weight. Login to the member portal (link below) to read our full OCA report.

Australia & New Zealand Market Movers

The Australian market climbed on Friday (ASX 200 index +1.2%), with miners leading the charge – Rio Tinto and BHP jumped +2.6% and +2.9% respectively. 

A surge in metals prices lifted the Australian market to a record high, shrugging off any concerns the Victorian lockdown will dent the domestic recovery and proving the power of fiscal stimulus remains a potent force for global shares. 

In stock news, Link Administration soared +5.0% after private equity giant KKR made an offer to buy its majority owned online real estate platform PEXA. 

The New Zealand market slipped on Friday (NZX 50 index -0.5%) as Mercury (-5.8%) gave up the previous day's gain and F&P Healthcare (-1.6%) fell again.

In stock news, Green Cross Health, the Group behind Unichem and Life Pharmacy, The Doctors and Access Community Health, reported Net Profit After Tax Attributable to Shareholders of $16.8 million that was in line with the underlying prior year result and includes growth in the Medical and Community Health divisions, offsetting retail softness in the Pharmacy division.


3 Things Markets will be Watching this Week

  1. Highlights this week include US Nonfarm payrolls (monthly employment data), and the latest ISM Manufacturing print in the US.
  2. Central bank rhetoric globally remains in focus for investors.
  3. Locally, the RBA takes centre stage on Tuesday along with Q1 GDP in Australia.
Global equity markets were mostly flat or up on Friday (S&P 500 index +0.01%) as bond and equity markets interpreted elevated US inflation as transitory.

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